Truth about the euro mirage

WE SHOULD go easy on the 'europhoria'. Although the single currency enters the New Year seemingly riding a high, appearances are deceptive.

In the 12 months since the successful launch of notes and coins, the currency has risen from 89 US cents to a peak of $1.05. It has also strengthened against sterling, from 61p to 65p.

But its rally is more a story of the dollar's decline, driven by America's huge trade deficit - shown by the fact that the euro fell 5% against the safe-haven Swiss franc last year, and 6.5% against gold.

And the currency is still languishing well below its launch levels four years ago against the dollar and the pound of $1.17 and 70p respectively. Since then, the eurozone economy has grown 16% - while Britain has grown 23%.

With Chancellor Gordon Brown's famous 'five economic tests' looming this summer, and Prime Minister Tony Blair calling the decision on joining 'the most important that faces this political generation', the euro's record will be a hot issue for 2003.

Investment bank Merrill Lynch sees the dollar's drift taking the euro to $1.10 this year. 'The eurozone's Growth and Stability Pact is holding back the central bank's ability to stimulate the economy,' said strategist Andrew Roberts. 'Europe's main engines of growth are Germany, France and Italy. They're not even going at half speed.'

Merrill believes Britain should enjoy stronger growth than euroland this year, widening the interest rate gap and strengthening sterling. 'The five economic tests are dead in the water,' said Roberts.